Crowdfunding your business idea

Small Business Guides

There are more ways than ever to raise money for your new project or business idea. Crowdfunding is the latest option, giving you access to thousands of potential investors. Here's how it works.

A new way of raising money

Online crowdfunding brings together people who want to invest in your business. Instead of you having to seek out potential investors, they come to you online. But when you raise money this way, what exactly do you 'sell'? And what do you get in exchange?

In this guide we'll look at the pros and cons of crowdfunding from your point of view. Then you can decide whether it's right for your business.

How does crowdfunding work?

Crowdfunding your business idea is a way of raising money from lots of people at once. People get funding for anything from space missions to paying for someone's dinner. But in this guide we'll concentrate on how it can help fund your business.

Crowdfunding lets many people pledge money to support a company or project. Often a total budget might be out of reach for an individual investor. But this is where lots of smaller investors can join together to reach the goal.

Crowdfunding websites let investors and companies meet and interact. In exchange for funding, companies offer something in return. And if the investors are interested, they'll pledge cash in support.

This is a big industry, with 16 billion US dollars of funding supplied in 2014. It can be an effective way of raising money, but it's not ideal for every business.

Three types of crowdfunding

There are many different crowdfunding sites covering a wide variety of interests and industries. But they can be grouped into three main types:

Reward based

Investors are offered a reward in exchange for funding. If the project is new software, investors might get a free copy of it. Or they could get something like limited edition merchandise.

Equity based

Investors receive unlisted company shares in exchange for their pledged money. This is becoming more popular due to investment restrictions in some countries changing. The JOBS Act has made this easier in the US.

Credit based

Groups of individual lenders are put in touch with companies that want to borrow money. This is like to peer-to-peer lending, but for businesses instead of individuals. Credit terms and interest rates vary, but are often more attractive than bank rates.

The pros and cons of crowdfunding

The basic idea of crowd financing is obviously appealing – and popular. The advantages include:

High project visibility
You don't have to work as hard to find people who might be interested in your idea. Crowdfunding gets you instant publicity – and the attention of thousands of potential investors.

Investor engagement
People can ask you questions and engage with you on crowd financing websites. It's a good way to build up a community before you even begin working on your project.

The barrier to entry is low
If you search crowdfunding websites, there are all sorts of weird and wonderful projects. When there’s no bank manager to convince, finding investors is no longer a problem.

Critical feedback
Not sure whether your project can succeed? Crowdfunding your business idea is a quick way to find out. If your project gains a lot of interest, it has a good chance of success.

But think carefully about the potential downsides before you try crowdfunding. Some of the disadvantages include:

Intellectual property risk
By publishing your idea on a public forum, you could lose control over your intellectual property. Make sure you file any necessary patents, trademarks and copyright paperwork before you start. Otherwise someone could steal your idea.

Loss of brand value
Your brand and reputation are priceless and should be treated as such. Choose reputable business crowdfunding sites and make sure your appeal is professional and presented well.

The price of success
It can be easier to raise money than to bring a new product or idea to market. Once you've crowdfunded your idea, you have an obligation to fulfil it. So be sure you can actually do that before you begin asking people for money.

Public forum
People can ask you questions and criticise your business plan online. If you don't manage this engagement well, it could backfire and affect your reputation. Be prepared for criticism, and know how to handle it effectively.

Crowdfunding gets you instant publicity – and the attention of thousands of potential investors.

Why do investors get involved?

The key to successful crowd financing is to understand what the investors are thinking. If you know what people want, you can make sure your project appeals to them. Here are some possibilities:

Your idea has financial value to them
Consider a company that's been searching for a way to automate their business processes. When your crowdfunding project appears, offering to do exactly that, there's a good chance they will pledge money. You're offering them a relatively cheap way to get what they want. If enough companies want the same thing, your project will be funded.

Your project has social merit
Businesses are increasingly expected to be socially conscious. It’s become more common for businesses to be ethical and make the world a better place. If your project ticks those boxes, you can expect a good response.

Your presentation is interesting and appealing
If you have an interesting and unusual presentation, you're more likely to gain funding. It's common for crowdfunding ideas to be judged on presentation as much as content. This may not seem fair, but it's the reality of crowdfunding.

They feel an emotional connection
Don't underestimate the power of emotion and nostalgia. One of the most successful crowdfunding projects in the UK was Elite: Dangerous. Thousands of schoolboys played the original game in the early 80s. And they formed a big part of the crowdfunding group for the new version 30 years later.

Their peers have invested money
News about interesting crowdfunding appeals can spread quickly, especially on social media. Some people will invest money because their friends or family have encouraged them to.

Location
Consider whether it matters to you where your investors are based. If you want funding for a global market research business, then it won't matter. But if you're crowdfunding a local café, that's different. Find a crowdfunding site that best suits your business. That will help you find the right investors.

Reach
It doesn't cost much to set up a basic crowdfunding website. But it takes a lot of time and money to build one that's successful and has a wide reach. Do your research carefully to find the one that's right for your business idea. The wider the reach, the greater the number of potential investors.

Regulations
Laws on crowdfunding vary around the world so make sure you double check these. And always ask an accountant for advice before you begin.

Costs
Crowdfunding sites will take their cut, even if your appeal fails. Read the small print carefully and make sure you understand the fee structure. Use good accounting software to test the business figures before you go ahead.

Make crowdfunding work for you

If you've decided to crowdfund your business idea, plan it carefully. Consider hiring professionals to help you present your idea. The better your presentation, the greater your chance of success.

Talk to potential investors and use social media to promote your message. Decide whether you want to use PR and marketing agencies. Anything that raises the profile of your campaign will help your crowdfunding effort succeed.

And when it does, make the most of the opportunity you've been given. Your investors have shown that they believe you can succeed with your new idea. With their backing and your hard work, you can prove them right.